Our website uses cookies to improve your user experience. If you continue browsing, we assume that you consent to our use of cookies. More information can be found in our Cookies Policy and Privacy Policy.

Poll swings

It is not just the main political parties which stand to win or lose in the general election now called for May 6, Samantha Downes asks how UK equities will fare following the most anticipated Parliamentary contest in recent years

The general election called for May 6 has as much potential to boost as to depress the UK equity market.

The most damaging election result to the markets is widely regarded as an uncertain one. A hung Parliament is considered to the worst possible scenario. After the general election of 1974 which put Edward Heath in charge of a minority Conservative Government the FTSE fell by 18 per cent.

James Lowen, co-manager of JO Hambro Capital Management’s UK equity income fund says certainty is more important than party politics.The outright 1992 Conservative victory – where there had been fears of a split vote – sent shares soaring by 13 per cent.

In the years since John Major’s victory, markets and currency have become more globalised, so, to some extent, the outcome of the election is irrelevant in the long term. With some investment banks predicting a 30 per cent chance of a hung Parliament, it may need to be.

Mr Lowen says: “Even if there is a hung Parliament, you have to remember that 70 per cent of earnings made by British companies are earnings made overseas.” He points out BP, HSBC and GlaxoSmithKline all make most of their profits outside the UK.

In fact, he says a hung Parliament could weaken sterling even further and make British-made goods even more attractive than they are.He says: “Such is the perceived weakness of the British economy and UK companies that a hung Parliament has already been priced in, so any election outcome would immediately spell a repricing of many equities.

“You could say the remaining 30 per cent of earnings – the ones made in the UK – have been priced with a hung Parliament in mind, so they are attractive, in that valuations are cheap.”

Other fund managers believe that some sectors will stand to gain, regardless of which party wins control.

Paul McGinnis, head of research at Co-operative Asset Management says public sector productivity in the decade from 1997 grew by 3.4 per cent compared with 20 per cent in the private sector. Because of this, he claims public sector productivity will be high on any incoming Government’s to-do list.

McGinnis, says: “Swift action is necessary and we believe those outsourcers with a diverse business model and already strong relationships with Government bodies have most to gain. Mitie is one company in the sector that is particularly well placed.

“Outsourcers contract on the basis they will maintain, and even improve, service levels while delivering cost savings of up to 30 per cent.McGinnis says not all outsourcers will make good investments. Companies able to improve the efficiency of existing operations and that have little exposure to current stalled big projects will benefit most.

It is not just the main political parties which stand to win or lose in the general election now called for May 6, Samantha Downes asks how UK equities will fare following the most anticipated Parliamentary contest in recent years

Lowen adds that some outsourcers such as Capita are already fully valued. He says: “We are looking at companies such as engineering consultancy WSP Group, its price to earnings ratio was seven times compared with Capita’s which had an 18 times price to earnings ratio.”

Lowen says his fund is not sector-specific but is looking at companies with a supply-side dynamic.

These are companies operating in sectors which have suffered from the recession but, because of their size and market dominance, are benefiting from the loss of competitors.

He points out the example of tour operator TUI Travel – owner of the Thomson and First Choice brands – which has seen competitors go under. “Already, holiday prices are up by 9 per cent on last year, because there are fewer operators. Majestic Wine is another example, it has seen large rivals like Threshers go under and has made inroads into some of that business.”

Andrew Milligan, head of global strategy at Standard Life Investments, says it is too early to tell what the election will spell for UK companies.He says: “This is a key conclusion from any election analysis, that the make-up of fiscal policy afterwards – and there will be some very considerable changes – will have important company or sector effects, for example, whether there is more pressure for outsourcing by parts of Government or how variable tax increases affect different parts of consumer spending.”

David Clark, manager of the Ignis UK smaller companies fund, believes that after the election there will be a renewal of takeover fever and that small-cap stocks operating in niche markets will benefit from companies seeking growth through acquisition of smaller rivals.

He says: “Even Tesco and the major food retailers may struggle to add top-line growth. The pharmaceutical majors, Glaxo and AstraZeneca, have few products in the pipeline and their existing patents are running down.

“The oil majors have headwinds of their own. BP and Shell are spending vast sums on exploration with no guarantee of finding new reserves. They are also investing heavily in renewable energy that will not feed into the top line in the near future.”

Regardless of sector, or company, a post-election share rally will rely on the confidence of investors and Lowen says many are waiting on the sidelines.

The Financial Services Comp- ensation Scheme is quizzing Keydata investors seeking compensation for their losses about the firm’s representations of third parties in its market- ing literature. Deloitte last week wrote on behalf of the FSCS to Keydata investors who are claiming compensation for their non-Isa secure income bonds 1-3, asking them to clarify how […]

One of the best sources of new business is your existing clients and, if they are estate planning clients, regular reviews are needed because people’s inheritance tax (IHT) problems tend to only get worse. Now, not a lot of things remain at the same rate as in 2009. If we turn the clock back, it […]

Newsletter

Latest from Money Marketing

The Competition and Markets Authority has criticised insurers over “stealth price rises” and costly exit fees for loyal customers. The watchdog looked into areas including cash savings, mortgages and home insurance after charity Citizens Advice raised a so-called “super complaint” over how longstanding customers are treated by financial services organisations. The CMA has recognised that […]

Banking lobbyists have warned that UK banks currently face higher tax rates than international counterparts, and that these could hasten banks’ departures if they remain after Brexit. Reuters reports that research commissioned by UK Finance and carried out by consultancy PwC shows London banks face an effective tax rate on profits of 50.6 percent, above […]

Barclays has been fined $15m (£11.9m) by US regulators after attempts were made to unmask a whistleblower by chief executive Jes Staley. In 2016, a Barclays employee sent two letters regarding concerns over the chief executive’s decision to hire a former colleague to work at the bank. The whistleblower posed questions both over the experience […]

19th December 20188:33 am

Comments

Leave a comment

Why register with Money Marketing ?

Providing trusted insight for professional advisers. Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.